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It was a realization not many years back that my dentist’s approach to client service exemplified what financial services should strive to be; and not in a pulling teeth sort of way. I now look forward to meeting with my dentist as a way to witness what true client service looks like.

At the end of every cleaning my dentist would point out the problems I was likely to face in the future, and the procedures I’d need to tackle at some point, along with what he thought the risks, benefits, and costs would be. Though many of these procedures didn’t happen for years, he didn’t fire me or pressure them into happening. Everything was simply his professional opinion, and up to me to give the go ahead to weight the costs, benefits, and timing.

It is my belief that paying for personal financial planning services should be just as personal. And clients shouldn’t be left to develop new relationships simply because they weren’t convinced by the professional advisor of the costs and benefits of a high cost service.

We all know most financial advisors sell a product. My dentist perhaps could make more by pushing people to complete higher complexity (and presumably higher revenue) procedures. If that was the case his clients would feel the same pressure that many advisors place on their clients to buy products from them, pay a high annual fee, or else find another advisor.

In all of my experiences in various compensation models, I’ve come to the conclusion that a fee-only, hourly approach to financial planning advice is a service that fits best with most individuals.

Unlike a fee-based relationships, NAPFA fee-only advisors are not compensated from investment or insurance products, and do not participate in financial advisory services with brokerage relationships that often rely on revenue sharing arraignments.

Some fee-only advisors charge an annual retainer fee, which can be appropriate to some, but the following explains why I find the hourly approach preferred for those who do not need significant and regular financial handholding:

Clients often overpay in the first year. In the retainer model you may come to an advisor for advice on a retirement opinion, but end up at 4-8 meetings that cover far more than you sought advice on, as the advisor attempts to get to know far more about you than you meant to share.

It may be worthwhile, but in a retainer relationship it is the dentist making that decision to charge for more than the patient agreed to, rather than the patient having the power to choose their procedures.

Retainer firms charge the same fee for time spent on providing information (such as how long to keep your financial files) as they do for providing advice. As an hourly planner I tend to create resources or point people in a direction to solve their simple finance answers rather than charge for information.

Clients often overpay in the second and subsequent years. The rationale for a high ongoing fee is that the client may have a life event maybe once every several years, and in that year the fees paid over the other years are justified.

The above is just not true however. I don’t pay my dentist for root canals he might do in five years. Likewise, you may never have complicated planning needs. Why pay for it today?

Due to the two points above, there is often high client turnover in the retainer firms I worked at. Many clients eventually rightly feel they don’t use enough of the services to justify the fee, and have to rework their plan with a new advisor who has new biases, and has to charge the high initial fee to get to know you all over again.

There are conflicts in every model (an hourly advisor clearly wants more hours to work after all); and to be sure, there are individuals that have advice needs that require meeting or services on a weekly or monthly basis where a retainer is justified.

However, most individuals and families should pay for financial planning services in a method that matches fees withneed. Nothing prevents an hourly advisor from recommending further services and letting the client have decide if (and when) the cost is worthwhile. My dentist reminds me every visit of why it’s important I come back. Personal financial advice may someday be delivered to the masses just like other fee-for-service professions.

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An hourly billing model for financial planning can certainly work for DIY-ers just looking for a second opinion and folks whose situation is fairly straightforward.

However, for clients who value having a relationship with a trusted advisor who constantly monitors the key elements of their multi-faceted financial lives, a retainer model works very well. By being constantly engaged, I often spot issues and planning opportunities for my clients that they, as busy people living busy lives, are in no position to spot themselves. In my opinion, an hourly service model does not allow for this level of proactivity since by definition it places the responsibility on the client to know when to call the planner. I have saved my clients several times my fee and many headaches as a result of my process of constant engagement. I also know they sleep better at night secure in the knowledge that I am an integral and ongoing part of their financial lives.

Thanks for the comment Joe. Retainers can work in the right circumstance, where there is a strong need for ongoing service. Based on a decade of experience with different models, I think it’s a sliver of the pie of those seeking services.

It’s hard to measure savings. For example, I could prepare income taxes and claim to save clients money, but in order to do that I charge more than a CPA who has the processes and procedures to provide a higher touch service at a lower price. But, at an hourly review the client gets an independent check from me, plus the CPA at a combined cost below what a retainer relationship may need to be. There is also the fact I would not be unbiased, having an incentive to show clients value perhaps by being more aggressive. Is it fair only to ‘save’ a client money, rather than recommend they see another professional where it serves them?

Many retainers place too much value on this idea of saving rather than providing the client the service they are looking for, and allowing them to choose others. Another example is many advisors assume there is value in a review of an investment portfolio only on an annual basis. Here as well, if you do not specialize, there is less savings than meets the eye. If what the client really requires is a few hours of your time to reivew a mix and help them make trades; is there really value in a high-cost retainer, simply because it is less than what a broker charges? Aren’t there low-cost options one could use that would provide ongoing support at less of a cost?

Absolutely, if someone requires ongoing handholding with several meetings per year a retainer may be appropriate. But, hourly does not mean there is not ‘ongoing’ planning or proactivity – rather, one must be more proactive to show value, rather than assume it will be there year in and out. An annual or semi-annual review is a tool to determine that many choose, which is what many retainer relationships end up being. Why charge the same rate to the client who wants 2 meetings over the client who wants 1?

Having more flexible engagement options can keep the vast majority of individuals that need upfront and irregular planning on the right path, where many others will simply find they can’t afford the ongoing fee, aren’t getting value compared to other services, and I submit end up changing plans and find a CPA and broker relationship anyhow.

I think clients will choose the model that works for them. The folks who work with me obviously see the value in an ongoing approach. I often receive inquiries from people for whom I feel a retainer relationship is not appropriate and refer them to hourly advisors. My goal is to work with folks who are looking for what I have to offer, not to champion one service model over another.

That’s great Joe; I’m glad a retainer works for your business. Clients choose the model that works for them when they know what the choices are and feel they have choices; you might agree that there is not enough awareness of options when it comes to working with advisors, and certainly the hourly option is not discussed enough in the public sphere.